Qualcomm’s Takeover Bid by Broadcom Raises Security Concern

Per a FierceWireless report, the United States’ government — through its Committee on Foreign Investment in the United States (CFIUS) — has finally intervened into Broadcom’s AVGO proposed $117 billion hostile takeover offer of Qualcomm QCOM. CFIUS is an inter-agency committee of the U.S. government that reviews the national security implications of foreign investments in U.S. companies or operations.

Per a recent CFIUS order, Qualcomm has postponed its 2018 annual shareholders’ meeting from Mar 6 to Apr 5. The delayed meeting gives each side a chance to present its case to Qualcomm shareholders. Meanwhile, CFIUS will also investigate and review the proposed takeover deal by Broadcom.

The government has raised concerns that the proposed takeover is likely to raise national security issues and potentially affect the United States’ role in the development of 5G wireless network technology, as China is forging ahead to take a lead in the space.

Broadcom’s Efforts and Threats from China

Broadcom has been trying for the past three-four months to takeover Qualcomm with its multiple bids. On Nov 6, 2017, Broadcom initially offered $70 per share, of which $60 was to be paid in cash and the rest in shares. The revised offer, which is Broadcom’s "best and final offer," values each share at $82 ($60 a share in cash and the rest in shares).

However, Broadcom’s attempts to acquire Qualcomm for creating a wireless powerhouse was thwarted again when its revised bid was rejected unanimously by Qualcomm’s board of directors, on grounds of inadequacy and potential antitrust hurdles.

Since this is an unsolicited, hostile bid to take control of the company, Broadcom is also looking to replace the entire Qualcomm board with 11 people of its own choosing.

Moreover, if Broadcom is successful in acquiring Qualcomm, it is expected to break up Qualcomm and sell the pieces to a Chinese firm. Thus, national wireless carriers would be left with no choice other than buying Chinese equipment.

This could potentially affect the U.S. position in the emerging market for 5G services, thus paving the way for Chinese companies to gain an upper hand in the sector. The U.S. market will be left with only some of the small existing number of equipment suppliers.

Consequently, if Broadcom succeeds in the takeover, it might be a major loss to the nation.

On the other hand, Broadcom’s successful takeover of Qualcomm might also be the biggest tech deal. The proposed combination of Broadcom and Qualcomm may create the world's third-largest semiconductor company, lagging Intel Corp. INTC and Samsung.

The semiconductor industry is locked up in a race of mergers and acquisitions. We currently await updates on this front as to which side the CFIUS decision turns up.

Price Performance

In the past six months, Qualcomm performed pretty well. Shares of Qualcomm have soared 27.1% outpacing the industry’s rally of 16.9%.

Harris currently carries a Zacks Rank #2 (Buy). The company has a positive earnings surprise history – surpassing the Zacks Consensus Estimate in three of the previous four quarters with an average beat of 6.71%.

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